SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-19049
FORTUNE INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
| INDIANA | 20-2803889 |
| (State or other jurisdiction of | (IRS Employer |
| incorporation or organization) | Identification Number) |
| 6402 Corporate Drive | 46278 |
| Indianapolis, IN | (Zip Code) |
| (Address of principal executive offices) | |
(317) 532-1374
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| | | | |
| Non-accelerated filer | ¨ | Smaller reporting company | x |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of May 17, 2010, 12,224,290 shares of the Company’s $0.10 per share par value common stock were outstanding.
Explanatory Note
The purpose of Amendment No. 1 to the Company’s Quarterly Report for the quarter ended March 31, 2010 is to reclassify a $250,000 debt forgiveness gain previously classified as a component of net income, to an increase in stockholders’ equity as additional paid-in capital.
For convenience, this amended Quarterly Report on Form 10-Q/A sets forth the original filing in its entirety, as amended where necessary to reflect the restatement. The following sections were revised to reflect this restatement:
| | · | Part I, Item 1. Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Shareholders’ Equity, Consolidated Statements of Cash Flows and Note 3; and |
| | · | Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The financial statements and other disclosures in the amended Quarterly Report on Form 10-Q/A do not reflect any events that have occurred after the Quarterly Report on Form 10-Q as initially filed on May 17, 2010. The following table sets forth the effects of the restatement on previously-reported consolidated financial statements as of, and for the nine months ended, March 31, 2010:
| | | March 31, 2010 | |
| | | As Previously | | | | |
| Consolidated Balance Sheets: | | Reported | | | Restated | |
| Additional Paid-in Capital and Warrants Outstanding | | $ | 19,336 | | | $ | 19,586 | |
| Accumulated Deficit | | $ | (30,703 | ) | | $ | (30,953 | ) |
| Consolidated Statements of Operations: | | Three Month Period Ended March 31, 2010 | |
| | | As Previously | | | | |
| | | Reported | | | Restated | |
| Other Income | | $ | 250 | | | $ | - | |
| Total Other Income | | $ | 275 | | | $ | 25 | |
| Income (Loss) Before Provision for Income Taxes | | $ | (10 | ) | | $ | (260 | ) |
| Net Income (Loss) From Continuing Operations | | $ | (24 | ) | | $ | (274 | ) |
| Net Income (Loss) | | $ | (28 | ) | | $ | (278 | ) |
| Net Income (Loss) Available to Common Shareholders | | $ | (176 | ) | | $ | (426 | ) |
| Basic Income (Loss) Per Common Share – Continuing Operations | | $ | (0.01 | ) | | $ | (0.03 | ) |
| Basic Income (Loss) Per Common Share | | $ | (0.01 | ) | | $ | (0.03 | ) |
| Diluted Income (Loss) Per Common Share – Continuing Operations | | $ | (0.01 | ) | | $ | (0.03 | ) |
| Diluted Income (Loss) Per Common Share | | $ | (0.01 | ) | | $ | (0.03 | ) |
| | | Nine Month Period Ended March 31, 2010 | |
| | | As Previously | | | | |
| | | Reported | | | Restated | |
| Other Income | | $ | 250 | | | $ | - | |
| Total Other Income | | $ | 323 | | | $ | 73 | |
| Income (Loss) Before Provision for Income Taxes | | $ | 859 | | | $ | 609 | |
| Net Income (Loss) From Continuing Operations | | $ | 1,137 | | | $ | 887 | |
| Net Income (Loss) | | $ | 1,114 | | | $ | 864 | |
| Net Income (Loss) Available to Common Shareholders | | $ | 670 | | | $ | 420 | |
| Basic Income (Loss) Per Common Share – Continuing Operations | | $ | 0.06 | | | $ | 0.03 | |
| Basic Income (Loss) Per Common Share | | $ | 0.06 | | | $ | 0.03 | |
| Diluted Income (Loss) Per Common Share – Continuing Operations | | $ | 0.05 | | | $ | 0.03 | |
| Diluted Income (Loss) Per Common Share | | $ | 0.05 | | | $ | 0.03 | |
| | | March 31, 2010 | |
| | | As Previously | | | | |
| | | Reported | | | Restated | |
| Consolidated Statements of Changes in Shareholders’ Equity | | | | | | |
| Net Income/Accumulated Deficit | | $ | 1,114 | | | $ | 864 | |
| Capital Contribution by Majority Shareholder/Additional Paid-in Capital and | | | | | | | | |
| Warrants Outstanding | | $ | - | | | $ | 250 | |
| Balance at March 31, 2010/Additional Paid-in Capital and Warrants Outstanding | | $ | 19,336 | | | $ | 19,586 | |
| Balance at March 31, 2010/Accumulated Deficit | | $ | (30,703 | ) | | $ | (30,953 | ) |
| | | | | | | | | |
| | | Nine Month Period Ended March
31, 2010 | |
| | | As Previously | | | | | |
| Consolidated Statements of Cash Flows | | Reported | | | Restated | |
| Net Income | | $ | 1,114 | | | $ | 864 | |
| Extinguishment of debt | | $ | (250 | ) | | $ | - | |
FORTUNE INDUSTRIES, INC.
FORM 10-Q
For The Quarterly Period Ended March 31, 2010
INDEX
| | | Page |
| PART I. Financial Information | | |
| ITEM 1. Financial Statements | | 3 |
| Consolidated Balance Sheets as of March 31, 2010 (unaudited, restated) and June 30, 2009 | | 3 |
| Consolidated Statements of Operations for the three and nine month periods ended March 31, 2010 (unaudited, restated) and May 31, 2009 (unaudited) | | 5 |
| Consolidated Statement of Changes in Shareholders’ Equity for the nine month period ended March 31, 2010 (unaudited, restated) | | 6 |
| Consolidated Statements of Cash Flows for the nine month periods ended March 31, 2010 and May 31, 2010 (unaudited, restated) | | 7 |
| Notes to the Unaudited Interim Consolidated Financial Statements | | 9 |
| ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | | 16 |
| ITEM 3. Quantitative and Qualitative Disclosures About Market Risk | | 23 |
| ITEM 4. Controls and Procedures | | 23 |
| PART II. Other Information | | |
| ITEM 1. Legal Proceedings | | 23 |
| ITEM 1A. Risk Factors | | 23 |
| ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | | 23 |
| ITEM 3 Defaults Upon Senior Securities | | 23 |
| ITEM 4. Submission of Matters to a Vote of Security Holders | | 24 |
| ITEM 5. Other Information | | 24 |
| ITEM 6. Exhibits | | 24 |
| Signatures | | 24 |
PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements.
FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
| | | March 31, | | | June 30, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | | | (Audited) | |
| | | | | | | |
| ASSETS | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash and equivalents | | $ | 1,747 | | | $ | 1,686 | |
| Restricted cash (Note 1) | | | 3,258 | | | | 3,142 | |
| Accounts receivable, net of allowance for doubtful accounts of $29 and $137 | | | 2,454 | | | | 2,622 | |
| Deferred tax asset | | | 1,750 | | | | 1,750 | |
| Prepaid expenses and other current assets | | | 1,147 | | | | 1,496 | |
| Assets of discontinued operations, net | | | 18 | | | | 112 | |
| Total Current Assets | | | 10,374 | | | | 10,808 | |
| | | | | | | | | |
| OTHER ASSETS | | | | | | | | |
| Property, plant & equipment, net of accumulated depreciation of $2,448 and $2,193 | | | 560 | | | | 764 | |
| Term note receivable related party (Note 2) | | | 2,509 | | | | 2,546 | |
| Deferred tax asset | | | 1,000 | | | | 750 | |
| Goodwill | | | 12,339 | | | | 12,339 | |
| Other intangible assets, net | | | 2,958 | | | | 3,263 | |
| Other long-term assets | | | 77 | | | | 43 | |
| Total Other Assets | | | 19,443 | | | | 19,705 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 29,817 | | | $ | 30,513 | |
See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements
FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
| | | March 31, | | | June 30, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited Restated) | | | (Audited) | |
| | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | |
| CURRENT LIABILITIES | | | | | | |
| Short-term debt and current maturities of long-term debt (Note 3) | | $ | 17 | | | $ | 275 | |
| Accounts payable | | | 902 | | | | 1,037 | |
| Health and workers' compensation reserves | | | 2,151 | | | | 4,125 | |
| Accrued expenses | | | 6,155 | | | | 5,376 | |
| Other current liabilities | | | 818 | | | | 1,003 | |
| Liabilities of discontinued operations, net | | | - | | | | 1 | |
| Total Current Liabilities | | | 10,043 | | | | 11,817 | |
| | | | | | | | | |
| LONG-TERM LIABILITIES | | | | | | | | |
| Health and workers' compensation reserves | | | 322 | | | | - | |
| Long-term debt, less current maturities (Note 3) | | | - | | | | 11 | |
| Total Long-Term Liabilities | | | 322 | | | | 11 | |
| | | | | | | | | |
| Total Liabilities | | | 10,365 | | | | 11,828 | |
| | | | | | | | | |
| SHAREHOLDERS' EQUITY (NOTE 5) | | | | | | | | |
| Common stock, $0.10 par value; 150,000,000 authorized; 12,224,290 and 12,082,173 issued and outstanding at March 31, 2010 and June 30, 2009, respectively | | | 1,201 | | | | 1,187 | |
| Series C Preferred stock, $0.10 par value; 1,000,000 authorized; 296,180 issued and outstanding at March 31, 2010 and June 30, 2009, respectively | | | 29,618 | | | | 29,618 | |
| Additional paid-in capital and warrants outstanding | | | 19,586 | | | | 19,253 | |
| Accumulated deficit | | | (30,953 | ) | | | (31,373 | ) |
| Total Shareholders' Equity | | | 19,452 | | | | 18,685 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 29,817 | | | $ | 30,513 | |
See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements
FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED, RESTATED)
| | | Three Month Period Ended | | | Nine Month Period Ended | |
| | | March 31, | | | May 31, | | | March 31, | | | May 31, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| REVENUES | | | | | | | | | | | | |
| Service revenues | | $ | 15,319 | | | $ | 15,393 | | | $ | 45,133 | | | $ | 50,057 | |
| Product revenues | | | - | | | | - | | | | - | | | | 17,929 | |
| TOTAL REVENUES | | | 15,319 | | | | 15,393 | | | | 45,133 | | | | 67,986 | |
| | | | | | | | | | | | | | | | | |
| COST OF REVENUES | | | | | | | | | | | | | | | | |
| Service cost of revenues | | | 12,684 | | | | 12,300 | | | | 35,911 | | | | 39,528 | |
| Product cost of revenues | | | - | | | | - | | | | - | | | | 14,944 | |
| TOTAL COST OF REVENUES | | | 12,684 | | | | 12,300 | | | | 35,911 | | | | 54,472 | |
| | | | | | | | | | | | | | | | | |
| GROSS PROFIT | | | 2,635 | | | | 3,093 | | | | 9,222 | | | | 13,514 | |
| | | | | | | | | | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 2,744 | | | | 2,568 | | | | 8,127 | | | | 11,744 | |
| Depreciation and amortization | | | 176 | | | | 207 | | | | 559 | | | | 798 | |
| Total Operating Expenses | | | 2,920 | | | | 2,775 | | | | 8,686 | | | | 12,542 | |
| | | | | | | | | | | | | | | | | |
| OPERATING INCOME (LOSS) | | | (285 | ) | | | 318 | | | | 536 | | | | 972 | |
| | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | | | | | | | | | |
| Interest income | | | 27 | | | | 69 | | | | 83 | | | | 107 | |
| Interest expense | | | (2 | ) | | | (32 | ) | | | (10 | ) | | | (112 | ) |
| Gain (loss) on disposal of assets | | | - | | | | 1 | | | | - | | | | (20 | ) |
| Exchange rate gain | | | - | | | | - | | | | - | | | | 1 | |
| Other income | | | - | | | | 42 | | | | - | | | | 76 | |
| Total Other Income | | | 25 | | | | 80 | | | | 73 | | | | 52 | |
| | | | | | | | | | | | | | | | | |
| INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES | | | (260 | ) | | | 398 | | | | 609 | | | | 1,024 | |
| | | | | | | | | | | | | | | | | |
| Provision for income taxes | | | 14 | | | | 26 | | | | (278 | ) | | | 70 | |
| | | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) FROM CONTINUING OPERATIONS | | | (274 | ) | | | 372 | | | | 887 | | | | 954 | |
| | | | | | | | | | | | | | | | | |
| DISCONTINUED OPERATIONS | | | | | | | | | | | | | | | | |
| Income (loss) from discontinued operations | | | (4 | ) | | | 8 | | | | (23 | ) | | | (70 | ) |
| | | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) | | | (278 | ) | | | 380 | | | | 864 | | | | 884 | |
| | | | | | | | | | | | | | | | | |
| Preferred stock dividends | | | 148 | | | | 370 | | | | 444 | | | | 815 | |
| | | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS | | $ | (426 | ) | | $ | 10 | | | $ | 420 | | | $ | 69 | |
| | | | | | | | | | | | | | | | | |
| Basic Income (Loss) Per Common Share-Continuing Operations | | $ | (0.03 | ) | | $ | 0.00 | | | $ | 0.03 | | | $ | 0.01 | |
| Basic Loss Per Common Share-Discontinued Operations | | | - | | | | - | | | | - | | | | - | |
| BASIC INCOME (LOSS) PER COMMON SHARE | | $ | (0.03 | ) | | $ | 0.00 | | | $ | 0.03 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | |
| Basic Weighted Average Shares Outstanding | | | 12,205,534 | | | | 12,082,173 | | | | 12,162,281 | | | | 11,828,878 | |
| | | | | | | | | | | | | | | | | |
| Diluted Income (Loss) Per Common Share-Continuing Operations | | $ | (0.03 | ) | | $ | 0.00 | | | $ | 0.03 | | | $ | 0.01 | |
| Diluted Loss Per Common Share-Discontinued Operations | | | - | | | | - | | | | - | | | | - | |
| DILUTED INCOME (LOSS) PER COMMON SHARE | | $ | (0.03 | ) | | $ | 0.00 | | | $ | 0.03 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | |
| Diluted Weighted Average Shares Outstanding | | | 14,715,577 | | | | 14,592,336 | | | | 14,672,444 | | | | 13,740,144 | |
See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements
FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED, RESTATED)
| | | | | | | | | Additional | | | | | | | |
| | | | | | | | | Paid-in Capital | | | | | | Total | |
| | | Common | | | Preferred | | | and Warrants | | | Accumulated | | | Shareholders' | |
| | | Stock | | | Stock | | | Outstanding | | | Deficit | | | Equity | |
| | | | | | | | | | | | | | | | |
| BALANCE AT JUNE 30, 2009 | | $ | 1,187 | | | $ | 29,618 | | | $ | 19,253 | | | $ | (31,373 | ) | | $ | 18,685 | |
| Issuance of 142,117 shares of common stock for compensation | | | 14 | | | | - | | | | 83 | | | | - | | | | 97 | |
| Net income | | | - | | | | - | | | | - | | | | 864 | | | | 1,114 | |
Capital contribution by majority shareholder | | | - | | | | - | | | | 250 | | | | - | | | | - | |
| Preferred stock dividends | | | - | | | | - | | | | - | | | | (444 | ) | | | (444 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| BALANCE AT MARCH 31, 2010 | | $ | 1,201 | | | $ | 29,618 | | | $ | 19,586 | | | $ | (30,953 | ) | | $ | 19,452 | |
See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements
FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED, RESTATED)
| | | Nine Months Ended | |
| | | March 31, | | | May 31, | |
| | | 2010 | | | 2009 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net Income | | $ | 864 | | | $ | 884 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 559 | | | | 965 | |
| Provision for losses on accounts receivable | | | (108 | ) | | | (142 | ) |
| Loss on disposal of assets | | | - | | | | 20 | |
| Stock based compensation | | | 97 | | | | 195 | |
| Deferred income taxes | | | (250 | ) | | | - | |
| Changes in certain operating assets and liabilities: | | | | | | | | |
| Restricted cash | | | (116 | ) | | | 2,117 | |
| Accounts receivable | | | 276 | | | | (19 | ) |
| Inventory, net | | | - | | | | 96 | |
| Prepaid assets and other current assets | | | 349 | | | | 435 | |
| Assets of discontinued operations | | | 94 | | | | 375 | |
| Other long-term assets | | | 3 | | | | 5 | |
| Accounts payable | | | (135 | ) | | | 404 | |
| Health and workers' compensation reserves | | | (1,652 | ) | | | (1,554 | ) |
| Accrued expenses and other current liabilities | | | 299 | | | | (2,314 | ) |
| Liabilities of discontinued operations | | | (1 | ) | | | (217 | ) |
| Net Cash Provided by Operating Activities | | | 279 | | | | 1,250 | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Capital expenditures | | | (50 | ) | | | (107 | ) |
| Proceeds from sale of assets | | | - | | | | 7 | |
| Net Cash Used in Investing Activities | | | (50 | ) | | | (100 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Payments on long-term debt majority shareholder | | | - | | | | (300 | ) |
| Borrowings on short term debt | | | - | | | | 250 | |
| Payments on long-term debt | | | (19 | ) | | | (48 | ) |
| Payments on convertible debentures | | | - | | | | (3,405 | ) |
| Dividends paid on preferred stock | | | (149 | ) | | | (198 | ) |
| Net Cash Used in Financing Activities | | | (168 | ) | | | (3,701 | ) |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS | | | 61 | | | | (2,551 | ) |
| | | | | | | | | |
| CASH AND EQUIVALENTS | | | | | | | | |
| Beginning of Period | | | 1,686 | | | | 4,740 | |
| | | | | | | | | |
| End of Period | | $ | 1,747 | | | $ | 2,189 | |
See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements
FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
| | | Nine Months Ended | |
| | | March 31, | | | May 31, | |
| | | 2010 | | | 2009 | |
| SUPPLEMENTAL DISCLOSURES | | | | | | |
| Interest paid | | $ | 10 | | | $ | 78 | |
| | | | | | | | | |
| Income taxes paid | | $ | 68 | | | $ | 67 | |
| | | | | | | | | |
| Non-cash investing and financing activities: | | | | | | | | |
| Retirement of series B preferred stock in exchange for series C | | | - | | | | (7,918 | ) |
| Issuance of series C preferred stock in exchange for series B | | | - | | | | 7,918 | |
| Issuance of series C preferred stock for debt extinguishment | | | - | | | | 21,700 | |
| Term note receivable for disposition of assets | | | - | | | | (3,240 | ) |
| Reduction in term loan in exchange for disposition of assets | | | - | | | | (10,000 | ) |
| | | $ | - | | | $ | 8,460 | |
See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements
FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED,
EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Basis of Presentation : The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2009 Annual Report on Form 10-K filed by Fortune Industries, Inc. (which, together with its subsidiaries unless the context requires otherwise, shall be referred to herein as the “Company”). The consolidated balance sheet at June 30, 2009 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by accounting principles generally accepted in the United States for complete financial statements. The Company’s consolidated balance sheet at March 31, 2010, and the consolidated statements of operations, cash flows and shareholders’ equity for the periods ended March 31, 2010 and May 31, 2009, have been prepared by the Company without audit. These unaudited financial statements contain, in the opinion of management, all adjustments (consisting of normal accruals and other recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States. The Company has evaluated subsequent events through the time these financial statements in the Form 10-Q report were filed with the Securities and Exchange Commission on May 14, 2010. The operating results for the nine-month period ended March 31, 2010 are not necessarily indicative of the operating results to be expected for the full fiscal year.
Nature of Business: Fortune Industries, Inc. is an Indiana corporation, originally incorporated in Delaware in 1988. The Company provides full service human resources outsourcing services through co-employment relationships with their clients. As a holding company, the Company has historically invested in businesses that are undervalued, underperforming, or in operations that are poised for significant growth. Management’s strategic focus is to support the revenue and earnings growth of its operations by creating synergies that can be leveraged to enhance the performance of the Company’s entities and by investing capital to fund expansion. Effective November 30, 2008, the Company sold its subsidiaries in its Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and Electronics Integration business segments to a related party. Refer to Note 2 for further details. As of this date, management will focus all its financial and human capital resources on its subsidiaries in the Business Solutions segment. The effect of this sale will impact the comparability of the Company’s financial information in future filings.
Restricted Cash: Restricted cash includes certificates of deposits and letters of credit issued to collateralize its obligations under its health and accident benefit program, its workers’ compensation program, and certain general insurance coverage related to the Company’s Business Solutions segment. At March 31, 2010, the Company had $3,258 in total restricted cash. Of this, $2,988 is restricted for various workers’ compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credits in accordance with various state regulations.
Goodwill and Other Indefinite-Lived Intangible Assets: Goodwill and other intangible assets with indeterminate lives are assessed for impairment at least annually and more often as triggering events occur. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of both goodwill and other intangible assets impairment. Since management judgment is involved in performing goodwill and other intangible assets valuation analyses, there is risk that the carrying value of the goodwill and other intangible assets may be overstated or understated.
The Company has elected to perform the annual impairment test of recorded goodwill and other indefinite-lived intangible assets as of the end of fiscal first quarter. The results of the last completed annual impairment test indicated that the fair value of the Business Solutions segment, as of September 30, 2009, exceeded the carrying, or book value, including goodwill, and therefore recorded goodwill and other indefinite-lived intangible assets were not subject to impairment.
Self Insurance: The Company’s PSM subsidiary maintains a loss-sensitive worksite employees’ health and accident benefit program. Under the insurance policy, PSM’s self-funded liability is limited to $200 per employee, with an aggregate liability limit of approximately $6,100. The aggregate liability limits are adjusted monthly based on the number of participants.
Workers’ Compensation: The Company’s PSM and CSM subsidiaries maintain partially self-funded workers’ compensation insurance programs. Under the insurance policies established at each company, PSM and CSM’s deductible liability is limited to $250 per incident, with an aggregate liability limit of approximately $2,000. Under the insurance policy established at ESG, the deductible liability is limited to $350 per incident, with no aggregate liability limit.
NOTE 2 – DISPOSITION OF ASSETS AND PRO FORMA RESULTS
On December 11, 2008, the Company completed a transaction with an effective date as of November 30, 2008 to sell all of the outstanding shares of common stock of the following wholly-owned subsidiaries: James H Drew Corporation; Nor-Cote International, Inc.; Fortune Wireless, Inc.; and Commercial Solutions, Inc. The subsidiaries were sold to related party entities owned by the Company’s two majority shareholders, the Chairman of the Board of Directors (“Chairman”) and the former Chief Executive Officer (“CEO”). The shares were sold in exchange for a $10,000 reduction in the outstanding balance of the Term Loan Note due to the Chairman, and a three year Promissory Note receivable in the amount of $3,240 with a maturity date of November 30, 2011. The Promissory Note bears interest at the prime rate plus 1% and is interest-only for the first twelve months, with $50,000 and $100,000 monthly principal payments due beginning December 30, 2009 and December 30, 2010, respectively. The unpaid balance at maturity is due in a lump sum payment.
The Company did not recognize any gain or loss from the sale as the consideration paid by the two largest shareholders as it was equal to the net book value of the sold subsidiaries.
As part of the terms of the sales transaction, the Chairman received 217,000 shares of Series C Preferred Stock as consideration for cancellation of the Term Note Balance of $21,700. In addition, the Company converted 79,180 shares of Series B Preferred Stock previously issued to and held by the Chairman to 79,180 shares of Series C Preferred Stock. The Series C Preferred Stock with a par value of $0.10 per share is non-redeemable, non-voting cumulative preferred and bears annual dividends of $5 per share in years one and two subsequent to the transaction date, $6 per share in year three subsequent to the transaction date and $7 per share thereafter. The dividends will be paid on a pro-rata basis monthly. Additionally, as part of the terms of the sales transaction, the Company issued the Chairman 2,200,000 warrants with a ten-year term and an exercise price of $ .40 per share.
At the request of the independent Directors, the Company received a fairness opinion from an independent financial advisor concluding that the consideration received by the Company in connection with the transaction is fair to the Company’s shareholders as a group..
The transaction was approved by the Company’s Board of Directors on December 10, 2008.
Effective June 30, 2009, the Company executed a Consent to Setoff in which the Borrower made an accelerated payment of $740 on the Amended and Restated Promissory Note. The Amended and Restated Promissory Note receivable in the amount of $2,500 matures on June 30, 2012, bears interest at the prime rate plus 1% and is interest-only for the first twelve months with $50,000 and $100,000 monthly principal payments due beginning July 30, 2010 and July 30, 2011, respectively. The unpaid balance at maturity is due in a lump sum payment.
On September 25, 2009, the Company reached an agreement with the Chairman to amend the dividend rates on the Series C Preferred Stock with an effective date of July 1, 2009. From the effective date forward the Series C Preferred Stock will bear annual dividends of $2 per share in years one and two subsequent to the effective date, $5 per share in year three subsequent to the effective date, $6 per share in year four subsequent to the effective date and $7 per share thereafter. All other terms of the Series C Preferred Shares remained unchanged.
The following is a condensed balance sheet disclosing the amounts assigned to each major asset and liability caption of the sold subsidiaries at the disposition date:
| Assets | | | |
| Cash and equivalents | | $ | 556 | |
| Accounts receivable, net | | | 12,927 | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | | 3,292 | |
| Inventory, net | | | 4,073 | |
| Deferred tax asset | | | 46 | |
| Prepaid expenses and other current assets | | | 790 | |
| Property, plant & equipment, net | | | 3,527 | |
| Goodwill | | | 152 | |
| Other long term assets | | | 13 | |
| Total Assets | | | 25,376 | |
| | | | | |
| Liabilities | | | | |
| Accounts payable | | | 4,248 | |
| Accrued expenses | | | 1,510 | |
| Billings in excess of costs and estimated earnings on uncompleted contracts | | | 402 | |
| Line of credit | | | 5,500 | |
| Other liabilities | | | 476 | |
| Total Liabilities | | | 12,136 | |
| | | | | |
| Net Assets | | $ | 13,240 | |
| | | | | |
| Cash considertation - related party term note | | $ | 10,000 | |
| Term note receivable - three year | | | 3,240 | |
| | | | | |
| Total consideration | | $ | 13,240 | |
Pro Forma Financial Statements
The accompanying unaudited pro forma consolidated statements of operations for the nine months ended May 31, 2009 is presented as if the sale had been completed as of the beginning of the periods presented. The unaudited pro forma consolidated statements of operations is presented for illustrative purposes only and is not necessarily indicative of the results of operations for the nine months ended May 31, 2009 that would have actually been reported had the sales transaction occurred at the dates indicated, nor is it indicative of future financial position or results of operations. The unaudited pro forma condensed consolidated statements of operations are based upon the respective historical financial statements of the Company and the subsidiaries. The pro forma data give effect to actual operating results as if the previous acquisitions occurred as of the beginning of the period presented. The pro forma data give effect to actual operating results prior to the dispositions and adjustments for the following:
| | · | To eliminate the impact of consolidating Fisbeck-Fortune Development, LLC (“FFD”), which prior to completion of the sales transaction, was considered a variable interest entity in conjunction with FIN 46R. With the sale of the subsidiaries described in Note 2 and the cancellation of the lease agreement between Fortune Industries, Inc. and FFD, the primary beneficiary relationship between the entities ceased to exist. |
| | · | To eliminate the results of operations of the subsidiaries sold. |
| | · | To adjust the dividends to the terms of the Series C Preferred shares that were issued in conjunction with the sales transaction. |
| | | For the Nine | |
| | | Months Ended | |
| | | May 31, | |
| | | 2009 | |
| | | | |
| Revenues | | $ | 48,562 | |
| Cost of Revenues | | | 38,759 | |
| | | | | |
| Gross Profit | | | 9,803 | |
| | | | | |
| Operating Expenses | | | | |
| Selling, general and administrative expenses | | | 8,554 | |
| Depreciation and amortization | | | 542 | |
| | | | | |
| Total Operating Expenses | | | 9,096 | |
| | | | | |
| Operating Income | | | 707 | |
| | | | | |
| Other Income | | | 11 | |
| | | | | |
| Income Before Provision for Income Taxes | | | 718 | |
| | | | | |
| Provision for income taxes | | | 66 | |
| | | | | |
| Net Income | | | 652 | |
| | | | | |
| Preferred stock dividends | | | 1,110 | |
| | | | | |
| Net Loss available to common shareholder | | $ | (458 | ) |
| | | | | |
| Basic loss per common share | | $ | (0.04 | ) |
| | | | | |
| Diluted loss per common share | | $ | (0.04 | ) |
NOTE 3 - DEBT ARRANGEMENTS
Term Note
Effective May 29, 2009, the Company entered into a $250 term note payable (note) with a bank. The note matured on October 28, 2009 with interest at the bank’s prime rate plus 2.0%. Effective October 27, 2009 the note was extended until December 28, 2009. The note was collateralized by certain assets of the Company’s majority shareholders and required the Company to maintain a minimum debt service coverage ratio of 1.25 to 1.0 among other covenants. During January 2010, the Company was held harmless on the note and was released from obligation by the bank. The amount forgiven of $250 is included in the Company’s Consolidated Statements of Changes in Shareholders’ Equity as Additional Paid-in Capital.
NOTE 4– EQUITY INCENTIVE PLANS AND OTHER STOCK COMPENSATION
Restricted Share Units
Effective April 13, 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan. Under terms of the 2006 Equity Incentive Plan, the Company may grant options, restricted share units and other stock-based awards to its management personnel as well as other individuals for up to 1.0 million shares of common stock. During the period ended March 31, 2010, 142,117 restricted share units were issued under this plan.
NOTE 5- SHAREHOLDERS’ EQUITY
Common Stock
The Company issued 142,117 shares of common stock during the nine month period ended March 31, 2010.
Preferred Stock
Effective November 30, 2008, the Company exchanged the 79,180 shares of non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10.00 per share for 79,180 non-voting Series C Preferred Stock with $0.10 par value and annual dividends of $5 per share in twelve month period ending November 30, 2009 and 2010, $6 per share in the twelve month period ending November 30, 2011 and $7 per share thereafter. The dividends will be paid on a pro-rata basis monthly.
Effective November 30, 2008, the Company issued 217,000 shares of $0.10 par value non-voting Series C Preferred Stock to the Company’s majority shareholder as consideration for cancellation of certain debt obligations owed by the Company under a line of credit promissory note dated June 5, 2008. The shares are not convertible to common stock and have various restrictions pertaining to their transferability as they are not registered under the Securities Act of 1933.
The shares issued are single class and pay on a monthly basis an annual cash dividend of $5 per share in the twelve month period ending November 30, 2009 and 2010, $6 per share in the twelve month period ending November 30, 2011 and $7 per share thereafter. On September 25, 2009, the Company reached an agreement with the Chairman to amend the dividend rates on the Series C Preferred Stock with an effective date of July 1, 2009. From the effective date forward the Series C Preferred Stock will bear an annual dividend of $2 per share in the years ending June 30, 2010 and 2011, $5 per share in the year ending June 30, 2012, $6 per share in the year ending June 30, 2013 and $7 per share thereafter. All other items of the Series C Preferred Shares remained unchanged. Dividends of $444 and $815 were accrued and/or paid for the nine months ended March 31, 2010 and May 31, 2009, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
On September 25, 2009, the Board of Directors approved the Chairman’s request to utilize approximately $8.15 million of the Company’s net operating loss carryforward for individual tax purposes related to the Chairman’s personal loss on indebtedness associated with the sales transaction as described in Note 2. The transaction had no effect on assets, liabilities, shareholders’ equity and net income as the gross deferred tax asset of approximately $3.3 million related to the net operating loss had a net asset value of $0 due to a corresponding ($3.3) million valuation allowance placed against the asset by management.
NOTE 7 - SEGMENT INFORMATION
Effective November 30, 2008, the Company sold or discontinued operations in its Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and Electronics Integration segments. As a result, the Company currently has one reportable business segment, Business Solutions. Prior to December 1, 2008, the Company was organized into five reportable business segments; Business Solutions, Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and Electronics Integration. The Company’s reportable business segments are organized in a manner that reflects how management reviews and evaluates those business activities. Certain businesses have been grouped together for segment reporting based upon similar products or product lines, marketing, selling and distribution characteristics. The segments are organized as follows:
| Segment & Entity | | Business Activity |
| | | |
| Business Solutions | | |
| Professional Staff Management, Inc. and subsidiaries; CSM, Inc. and subsidiaries and related entities; Employer Solutions Group, Inc. and related entities; Precision Employee Management, LLC | | Provider of outsourced human resource services |
| | | |
| Wireless Infrastructure | | |
| Fortune Wireless, Inc.; Magtech Services, Inc.; Cornerstone Wireless Construction Services, Inc.; James Westbrook & Associates, LLC | | Provider turnkey development services for the deployment of wireless networks |
| | | |
| Transportation Infrastructure | | |
| James H. Drew Corp. and subsidiaries | | Installer of fiber optic, smart highway systems, traffic signals, street signs, high mast and ornamental lighting, guardrail, wireless communications, and fabrications of structural steel |
| | | |
| Ultraviolet Technologies | | |
| Nor-Cote International, Inc. and subsidiaries | | Manufacturer of UV curable screen printing ink products |
| | | |
| Electronics Integration | | |
| Kingston Sales Corporation; Commercial Solutions, Inc.; Telecom Technology, Corp. | | Distributor and installer of home and commercial electronics |
The following tables report data by segment and exclude revenues from transactions with other operating segments:
| | | Business | | | Holding | | | Segment | |
| | | Solutions (1) | | | Company | | | Totals | |
| Three months ended March 31, 2010 | | | | | | | | | |
| Revenue | | $ | 15,319 | | | $ | - | | | $ | 15,319 | |
| Cost of revenue | | | 12,684 | | | | - | | | | 12,684 | |
| Gross profit | | | 2,635 | | | | - | | | | 2,635 | |
| Operating expenses | | | | | | | | | | | | |
| Selling, general and administrative | | | 2,595 | | | | 149 | | | | 2,744 | |
| Depreciation and amortization | | | 138 | | | | 38 | | | | 176 | |
| Total operating expenses | | | 2,733 | | | | 187 | | | | 2,920 | |
| | | | | | | | | | | | | |
| Segment operating loss | | $ | (98 | ) | | $ | (187 | ) | | $ | (285 | ) |
(1) Gross billings of $113,313 less worksite employee payroll costs of $97,994.
| | | Business | | | Holding | | | Segment | |
| | | Solutions (1) | | | Company | | | Totals | |
| Three Months Ended May 31, 2009 | | | | | | | | | |
| Revenue | | $ | 15,393 | | | $ | - | | | $ | 15,393 | |
| Cost of revenue | | | 12,300 | | | | - | | | | 12,300 | |
| Gross profit | | | 3,093 | | | | - | | | | 3,093 | |
| Operating expenses | | | | | | | | | | | | |
| Selling, general and administrative | | | 2,613 | | | | (45 | ) | | | 2,568 | |
| Depreciation and amortization | | | 160 | | | | 47 | | | | 207 | |
| Total operating expenses | | | 2,773 | | | | 2 | | | | 2,775 | |
| | | | | | | | | | | | | |
| Segment operating income (loss) | | $ | 320 | | | $ | (2 | ) | | $ | 318 | |
(1) Gross billings of $129,133 less worksite employee payroll costs of $113,740.
| | | Business | | | Holding | | | Segment | |
| | | Solutions (1) | | | Company | | | Totals | |
| Nine months ended March 31, 2010 | | | | | | | | | |
| Revenue | | $ | 45,133 | | | $ | - | | | $ | 45,133 | |
| Cost of revenue | | | 35,911 | | | | - | | | | 35,911 | |
| Gross profit | | | 9,222 | | | | - | | | | 9,222 | |
| Operating expenses | | | | | | | | | | | | |
| Selling, general and administrative | | | 7,681 | | | | 446 | | | | 8,127 | |
| Depreciation and amortization | | | 437 | | | | 122 | | | | 559 | |
| Total operating expenses | | | 8,118 | | | | 568 | | | | 8,686 | |
| | | | | | | | | | | | | |
| Segment operating income (loss) | | $ | 1,104 | | | $ | (568 | ) | | $ | 536 | |
(1) Gross billings of $389,539 less worksite employee payroll costs of $344,406.
| | | Business | | | Wireless | | | Transportation | | | Ultraviolet | | | Electronics | | | Holding | | | | |
| | | Solutions (1) | | | Infrastructure | | | Infrastructure | | | Technologies | | | Integration | | | Company | | | Totals | |
| Nine Months Ended May 31, 2009 | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 48,562 | | | $ | 3,312 | | | $ | 12,090 | | | $ | 2,771 | | | $ | 1,251 | | | $ | - | | | $ | 67,986 | |
| Cost of revenue | | | 38,759 | | | | 2,458 | | | | 10,747 | | | | 1,596 | | | | 912 | | | | - | | | | 54,472 | |
| Gross profit | | | 9,803 | | | | 854 | | | | 1,343 | | | | 1,175 | | | | 339 | | | | - | | | | 13,514 | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 8,627 | | | | 650 | | | | 781 | | | | 1,320 | | | | 238 | | | | 128 | | | | 11,744 | |
| Depreciation and amortization | | | 495 | | | | 11 | | | | 5 | | | | 59 | | | | 1 | | | | 227 | | | | 798 | |
| Total operating expenses | | | 9,122 | | | | 661 | | | | 786 | | | | 1,379 | | | | 239 | | | | 355 | | | | 12,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment operating income (loss) | | $ | 681 | | | $ | 193 | | | $ | 557 | | | $ | (204 | ) | | $ | 100 | | | $ | (355 | ) | | $ | 972 | |
(1) Gross billings of $419,737 less worksite employee payroll costs of $371,175.
| | | Business | | | Electronics | | | Holding | | | | |
| | | Solutions | | | Integration | | | Company | | | Totals | |
| As of March 31, 2010 (Unaudited) | | | | | | | | | | | | |
| Current Assets | | | | | | | | | | | | |
| Cash and equivalents | | $ | 1,649 | | | $ | - | | | $ | 98 | | | $ | 1,747 | |
| Restricted cash | | | 3,258 | | | | - | | | | - | | | | 3,258 | |
| Accounts receivable, net | | | 2,452 | | | | - | | | | 2 | | | | 2,454 | |
| Deferred tax asset | | | 1,750 | | | | - | | | | - | | | | 1,750 | |
| Prepaid expenses and other current assets | | | 1,189 | | | | - | | | | (42 | ) | | | 1,147 | |
| Assets of discontinued operations, net | | | - | | | | 18 | | | | - | | | | 18 | |
| Total Current Assets | | | 10,298 | | | | 18 | | | | 58 | | | | 10,374 | |
| | | | | | | | | | | | | | | | | |
| Other Assets | | | | | | | | | | | | | | | | |
| Property, plant & equipment, net | | | 408 | | | | - | | | | 152 | | | | 560 | |
| Term note receivable-related party | | | - | | | | - | | | | 2,509 | | | | 2,509 | |
| Deferred tax asset | | | 1,000 | | | | - | | | | - | | | | 1,000 | |
| Goodwill | | | 12,339 | | | | - | | | | - | | | | 12,339 | |
| Other intangible assets, net | | | 2,958 | | | | - | | | | - | | | | 2,958 | |
| Other long term assets | | | 55 | | | | - | | | | 22 | | | | 77 | |
| Total Other Assets | | | 16,760 | | | | - | | | | 2,683 | | | | 19,443 | |
| | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 27,058 | | | $ | 18 | | | $ | 2,741 | | | $ | 29,817 | |
| | | Business | | | Electronics | | | Holding | | | | |
| | | Solutions | | | Integration | | | Company | | | Totals | |
| As of June 30, 2009 (Audited) | | | | | | | | | | | | |
| Current Assets | | | | | | | | | | | | |
| Cash and equivalents | | $ | 1,622 | | | $ | - | | | $ | 64 | | | $ | 1,686 | |
| Restricted cash | | | 3,142 | | | | - | | | | - | | | | 3,142 | |
| Accounts receivable, net | | | 2,619 | | | | - | | | | 3 | | | | 2,622 | |
| Deferred tax asset | | | 1,750 | | | | - | | | | - | | | | 1,750 | |
| Prepaid expenses and other current assets | | | 1,506 | | | | - | | | | (10 | ) | | | 1,496 | |
| Assets of discontinued operations, net | | | - | | | | 112 | | | | - | | | | 112 | |
| Total Current Assets | | | 10,639 | | | | 112 | | | | 57 | | | | 10,808 | |
| | | | | | | | | | | | | | | | | |
| Other Assets | | | | | | | | | | | | | | | | |
| Property, plant & equipment, net | | | 489 | | | | - | | | | 275 | | | | 764 | |
| Term note receivable-related party | | | - | | | | - | | | | 2,546 | | | | 2,546 | |
| Deferred tax asset | | | 750 | | | | - | | | | - | | | | 750 | |
| Goodwill | | | 12,339 | | | | - | | | | - | | | | 12,339 | |
| Other intangible assets, net | | | 3,263 | | | | - | | | | - | | | | 3,263 | |
| Other long term assets | | | 22 | | | | - | | | | 21 | | | | 43 | |
| Total Other Assets | | | 16,863 | | | | - | | | | 2,842 | | | | 19,705 | |
| | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 27,502 | | | $ | 112 | | | $ | 2,899 | | | $ | 30,513 | |
NOTE 8 – GOING CONCERN
The accompanying consolidated financials statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2, by selling the subsidiaries in four segments that overall have been underperforming and require a higher level of working capital investment, management believes they will be able to start generating positive cash flows immediately. The conversion of the outstanding debt to preferred stock by the Company’s majority shareholder will also result in a significant decrease in the debt service requirements in 2010. With the Company’s human capital and financial resources all focusing on the profitability of a segment that historically has generated operating income and positive cash flows from operations, management believes the Company will have adequate cash to fund anticipated needs through June 30, 2010. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 9 – SUBSEQUENT EVENT
On April 30, 2010, the Company entered into a $1 million term note with a bank. The term note requires twenty four consecutive monthly payments of principal plus accrued interest at the Bank’s Prime Rate (not less than 4.5% per annum). The term note matures on April 30, 2012. The term note is secured by all assets of the Company and the personal guarantee of the Company’s majority shareholder. The note is subject to certain covenants including minimum cash flow coverage and current ratio requirements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Statements contained in this document, as well as some statements by the Company in periodic press releases and oral statements of Company officials during presentations about the Company constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements that are predictive in nature, depend on or refer to future events or conditions, which include words such as “expect,” “estimate,” “anticipate,” “predict,” “believe” and similar expressions. These statements are based on the current intent, belief or expectation of the Company with respect to, among other things, trends affecting the Company’s financial condition or results of operations. These statements are not guaranties of future performance and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Actual events and results involve risks and uncertainties and may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Factors that might cause or contribute to such differences, include, but are not limited to, the risks and uncertainties that are discussed under the heading “Risk Factors” disclosed within Form 10-K for the ten months ended June 30, 2009. Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission.
OVERVIEW
As a holding company of various product and service entities, we have historically invested in businesses that we believe are undervalued or underperforming, and /or in operations that are poised for significant growth. Management’s strategic focus is to support the growth of its operations by increasing revenues and revenue streams, managing costs and creating earnings growth.
Our operations are largely decentralized from the corporate office. Autonomy is given to subsidiary entities, and there are few integrated business functions (i.e. sales, marketing, purchasing and human resources). Day-to-day operating decisions are made by subsidiary management teams. Our Corporate management team assists in operational decisions when deemed necessary, selects subsidiary management teams and handles capital allocation among our operations.
We were incorporated in the state of Delaware in 1988, restructured in 2000 and redomesticated to the state of Indiana in May 2005. Prior to 2001, we conducted business mainly in the entertainment industry.
Until November 30, 2008, we classified our businesses under five operating segments: Business Solutions; Wireless Infrastructure; Transportation Infrastructure; Ultraviolet Technologies; and Electronics Integration. Effective November 30, 2008, we approved the sale of all of our remaining operating subsidiaries within four of our five segments (Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Infrastructure, and Electronics Integration). Consequently, as of the effective date of the transaction, our Business Solutions segment is the Company’s remaining operating segment. The sales transaction, combined with other significant events disclosed in Note 2 of our financial statements in Item 1, will change the focus of our Company in fiscal 2009 and thereafter. This operational change in our Company will impact the comparability of our financial information compared to historical data presented in past filings.
Recent Developments
On April 30, 2010, the Company entered into a $1 million term note with a bank. The term note requires twenty four consecutive monthly payments of principal plus accrued interest at the Bank’s Prime Rate (not less than 4.5% per annum). The term note matures on April 30, 2012. The term note is secured by all assets of the Company and the personal guarantee of the Company’s majority shareholder. The note is subject to certain covenants including minimum cash flow coverage and current ratio requirements.
On January 15, 2010, our Board of Directors appointed Tena Mayberry to the position of Chief Executive Officer of the Company. Ms. Mayberry is replacing John F. Fisbeck as the Company’s Chief Executive Officer.
On January 15, 2010, the Company entered into a Settlement Agreement with its CEO John Fisbeck which included a) immediate resignation of Mr. Fisbeck as CEO of the company, b) immediate resignation of Mr. Fisbeck from the Company’s Board of Directors, and c) waiver of certain severance payments included in his Employment Agreement.
On April 13, 2009, our Board of Directors approved a change in the Company’s fiscal year end from August 31 st to June 30 th commencing with our fiscal year 2009. This resulted in a ten month period for fiscal 2009.
Effective November 30, 2008, the Company completed a transaction to sell all of the outstanding shares of common stock of the following wholly-owned subsidiaries: James H Drew Corporation, Nor-Cote International, Inc., Fortune Wireless, Inc. and Commercial Solutions, Inc. As of this date, the subsidiaries were sold to related party entities owned by the Company’s majority shareholders in exchange for a $10,000,000 reduction in the outstanding balance of the term loan note due to the majority shareholder and a three-year term note in the amount of $3,240,000. The transaction also included the conversion of the remaining term loan note balance to Preferred Stock and the issuance of additional warrants. For further discussion of this transaction, see Note 2 – Disposition of Assets in the Notes to the Consolidated Financial Statements. The Company did not recognize any gain from the sale as the consideration paid by the two largest shareholders as it was equal to the net book value of the sold subsidiaries.
Effective November 30, 2008, the Company no longer operated in the Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies and Electronics Integration Segments.
Effective December 1, 2008, the Company devoted substantially all its resources on the growth and profitability of the Business Solutions segment.
Business Solutions Segment
The Business Solutions segment is comprised of Professional Employer Organizations (PEOs) which provide full-service human resources outsourcing services through co-employment relationships with their clients. Companies operating in the Business Solutions Segment include PSM, CSM, PEM, and ESG. Our PEOs provide services typically managed by a company’s internal human resources and accounting departments, including payroll and tax processing and management, worker’s compensation and risk management, benefits administration, unemployment administration, human resource compliance services, 401k and retirement plan administration and employee assessments. Clients represent a wide variety of industries from healthcare, professional services, software development, manufacturing logistics, telemarketing and construction. Combined, these organizations provide co-employment services to approximately 13,000 employees in 48 states.
Wireless Infrastructure Segment
Through November 30, 2008, we invested in wireless infrastructure businesses, having completed six acquisitions primarily related to infrastructure products and service offerings related to the development, marketing, management, maintenance and upgrading of wireless telecommunications sites. Subsidiaries operating in the Company’s Wireless Infrastructure segment included Fortune Wireless, Magtech Services, Inc., Cornerstone Wireless Construction Services, Inc. and James Westbrook & Associates, LLC.
Effective November 30, 2008, the Company sold its subsidiaries operating in the Wireless Infrastructure segment.
Transportation Infrastructure Segment
Through November 30, 2008, the Company owned subsidiaries in its Transportation Infrastructure segment that assist customers with the development, maintenance and upgrading of transportation infrastructure and commercial construction projects. Transportation infrastructure products and services are performed by JH Drew. JH Drew was acquired in April 2004 and has been operating for over fifty years servicing contractors and state departments of transportation throughout the Midwestern United States. JH Drew is a leading specialty contractor in the field of transportation infrastructure, including guardrail, electrical components, and the fabrication and installation of structural steel for commercial buildings.
Effective November 30, 2008, the Company sold its subsidiaries operating in the Transportation Infrastructure segment.
Ultraviolet Technologies Segment
Through November 30, 2008, the Company owned subsidiaries in its Ultraviolet (UV) Technologies segment that manufactured UV curable screen printing inks. UV Technologies products are manufactured by Nor-Cote, which we acquired in July 2003. These ink products are printed on many types of plastic, metals and other substrates that are compatible with the UV curing process. Typical applications are plastic sheets, point-of-purchase (POP) signage, banners, decals, cell phones, bottles and containers, CD and DVD, rotary-screen printed labels, and membrane switch overlays for conductive ink. Nor-Cote has operating facilities in the United States, United Kingdom, China, Singapore and Mexico, with worldwide distributors located in South Africa, Australia, Canada, China, Colombia, Hong Kong, India, Indonesia, Italy, Japan, Korea, Mexico, New Zealand, Poland, Spain, Taiwan, Thailand and the United States.
Effective November 30, 2008, the Company sold its subsidiaries operating in the Ultraviolet Technologies segment.
Electronics Integration Segment
Through November 30, 2008, the Company owned subsidiaries in its Electronics Integration segment that sell and install a variety of electronic products and equipment, including video, sound and security products. Subsidiaries included Kingston, Commercial Solutions and Telecom Technology Corp. (TTC) d/b/a Audio-Video Revolution, Inc. (AVR).
Effective November 30, 2008, the Company sold its subsidiary Commercial Solutions and discontinued operations of its subsidiaries Kingston and TTC d/b/a AVR in its Electronics Integration segment.
CRITICAL ACCOUNTING POLICIES
The Company’s accounting policies, which are in compliance with accounting principles generally accepted in the United States, require application of methodologies, estimates and judgments that have a significant impact on the results reported in the Company’s financial statements. Those policies that, in the belief of management, are critical and require the use of complex judgment in their application, are disclosed on the Company’s Form 10-K for the year ended June 30, 2009. Since June 30, 2009, there have been no material changes to the Company’s critical accounting policies.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) ASC 820-10 (formerly SFAS 157), “Fair Value Measurements” was issued. ASC 820-10 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. ASC 820-10, which does not require any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. The standard was effective for fiscal years beginning after November 15, 2007. However, the FASB delayed the effective date of ASC 820-10 for all non-financial assets and non-financials liabilities until fiscal years beginning after November 15, 2008. Accordingly, we adopted ASC 820-10 for our financial assets and liabilities on September 1, 2008 and adopted ASC 820-10 for our non-financial assets and liabilities on July 1, 2009. The adoption did not have a material impact on our consolidated financial statements.
In December 2007, the FASB issued ASC No. 805-10 (formerly SFAS No. 141R) “Business Combinations”. ASC No.805-10 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statements also provides guidance for recognizing and measuring the goodwill acquired in the business combination and specifies what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC No. 805-10 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Our effective date for ASC 805-10 was July 1, 2009. The adoption of ASC No. 805-10 did not have a material impact on our consolidated financial statements.
In June 2008, the FASB issued ASC 260-10 (formerly FASB Staff Position No. EITF 03-6-1), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” . ASC 260-10 concludes that unvested restricted share awards that pay nonforfeitable cash dividends are participating securities and are subject to the two-class method of computing earnings per share. Our effective date for ASC 260-10 was July 1, 2009. The adoption of ASC 260-10 did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued ASC No. 825-10-65-1 (formerly FAS 107-1 and APB 28-1), “ Interim Disclosures about Fair Value of Financial Instruments ” . This ASC essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the ASC requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. These additional disclosures will be required beginning with the quarter ending September 30, 2009. The adoption of ASC No. 825-10-65-1 did not have a material impact on our consolidated financial statements.
In May 2009, FASB ASC 855-10 (formerly SFAS No. 165), “ Subsequent Events” was issued. ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date (“subsequent events”), but before the financial statements are issued or available to be issued and requires disclosure of the date through which the entity has evaluated subsequent events and the basis for that date. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009; the Company adopted ASC 855-10 for the quarter ended June 30, 2009. The Company evaluated subsequent events through the time we filed our Form 10-Q with the Securities and Exchange Commission on February 16, 2010 and will continue to evaluate subsequent events through the issuance date of future required filings. The adoption did not have a material impact on our consolidated financial statements.
In June 2009, FASB ASC 105-10 (formerly SFAS 168), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” was issued. ASC 105-10 is the single official source of authoritative U.S. GAAP, superseding all other accounting literature except that issued by the Securities and Exchange Commission. As of July 2009, only one level of authoritative U.S. GAAP exists. All other literature will be considered non-authoritative. The Codification does not change U.S. GAAP; instead, it introduces a new referencing system that is designed to be an easily accessible, user-friendly online research system. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASC 105-10 for the quarter ended September 30, 2009. The adoption did not have a material impact on our consolidated financial statements.
Other new pronouncements issued but not effective until after March 31, 2010, are not expected to have a significant effect on the company’s consolidated financial statements.
RESULTS OF OPERATIONS: COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2010 AND MAY 31, 2009
Executive Overview of Financial Results
Results of operations for the three and nine month periods ended March 31, 2010 and May 31, 2009 are as follows:
| | | Revenue for the | | | Operating income (loss) for the | |
| | | Three Months Ended | | | Three Months Ended | |
| | | March 31, | | | May 31, | | | March 31, | | | May 31, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
| Business Solutions | | $ | 15,319 | | | $ | 15,393 | | | $ | (98 | ) | | $ | 320 | |
| Holding Company | | | - | | | | - | | | | (187 | ) | | | (2 | ) |
| Segment Totals | | $ | 15,319 | | | $ | 15,393 | | | $ | (285 | ) | | $ | 318 | |
| | | | | | | | | | | | | | | | | |
| Net Income (Loss) Available to Common Shareholders | | | | | | | | | | $ | (426 | ) | | $ | 10 | |
| | | Revenue for the | | | Operating income (loss) for the | |
| | | Nine Months Ended | | | Nine Months Ended | |
| | | March 31, | | | May 31, | | | March 31, | | | May 31, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
| Business Solutions | | $ | 45,133 | | | $ | 48,562 | | | $ | 1,104 | | | $ | 681 | |
| Wireless Infrastructure | | | - | | | | 3,312 | | | | - | | | | 193 | |
| Transportation Infrastructure | | | - | | | | 12,090 | | | | - | | | | 557 | |
| Ultraviolet Technologies | | | - | | | | 2,771 | | | | - | | | | (204 | ) |
| Electronics Integration | | | - | | | | 1,251 | | | | - | | | | 100 | |
| Holding Company | | | - | | | | - | | | | (568 | ) | | | (355 | ) |
| Segment Totals | | $ | 45,133 | | | $ | 67,986 | | | $ | 536 | | | $ | 972 | |
| | | | | | | | | | | | | | | | | |
| Net Income Available to Common Shareholders | | | | | | | | | | $ | 420 | | | $ | 69 | |
Net loss available to common stock shareholders was $0.4 million or $0.03 per diluted share on revenue of $15.3 million for the three month period ended March 31, 2010 compared with net income available to common stock shareholders of $0.01 million or $0.00 per diluted share on revenue of $15.4 million for the three month period ended May 31, 2009. This represents a 0.5% decrease in revenue and a 4,100% percent decrease in net income.
Net income available to common stock shareholders was $0.4 million or $0.03 per diluted share on revenue of $45.1 million for the nine month period ended March 31, 2010 compared with net income available to common stock shareholders of $0.07 million or $0.01 per diluted share on revenue of $68.0 million for the nine month period ended May 31, 2009. This represents a 34% decrease in revenue and an 471% percent increase in net income.
The following factors primarily contributed to the decrease in revenue for the three and nine-month periods ended March 31, 2010:
| · | Decrease in Business Solutions is due to a decrease in the total number of worksite employees related to client reductions in a) base payrolls, b) bonus programs, and c) overall staffing levels, all related to the downturn in economic conditions. |
| · | The Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and the Electronics Integration decreases are due to the sale and or discontinuation of operations for the subsidiaries in these divisions. |
The following factors primarily contributed to the decrease in segment operating income for the three and nine month periods ended March 31, 2010:
| · | Decreases in the Business Solutions are due to fewer enrollments in the health and workers compensation plans as a result of client reductions in base payrolls and overall staffing levels, and increases in the state unemployment rates without a corresponding increase to our clients. |
| · | The Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and the Electronics Integration increases are due to the sale and or discontinuation of operations for the subsidiaries in these divisions. |
Results by segment are described in further detail as follows:
Business Solutions
Business Solutions segment operating results for three and nine month periods ended March 31, 2010 and May 31, 2009 are as follows:
| | | Three Month Period Ended | | | Nine Month Period Ended | |
| | | March 31, 2010 | | | May 31, 2009 | | | March 31, 2010 | | | May 31, 2009 | |
| | | (Dollars in thousands) | |
| Revenues | | $ | 15,319 | | | | 100 | % | | $ | 15,393 | | | | 100 | % | | $ | 45,133 | | | | 100 | % | | $ | 48,562 | | | | 100 | % |
| Cost of revenues | | | 12,684 | | | | 82.8 | % | | | 12,300 | | | | 79.9 | % | | | 35,911 | | | | 79.6 | % | | | 38,759 | | | | 79.8 | % |
| Gross profit | | | 2,635 | | | | 17.2 | % | | | 3,093 | | | | 20.1 | % | | | 9,222 | | | | 20.4 | % | | | 9,803 | | | | 20.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 2,595 | | | | 16.9 | % | | | 2,613 | | | | 17.0 | % | | | 7,681 | | | | 17.0 | % | | | 8,627 | | | | 17.8 | % |
| Depreciation and amortization | | | 138 | | | | 0.9 | % | | | 160 | | | | 1.0 | % | | | 437 | | | | 1.0 | % | | | 495 | | | | 1.0 | % |
| Total operating expenses | | | 2,733 | | | | 17.8 | % | | | 2,773 | | | | 18.0 | % | | | 8,118 | | | | 18.0 | % | | | 9,122 | | | | 18.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment operating income (loss) | | $ | (98 | ) | | | -0.6 | % | | $ | 320 | | | | 2.1 | % | | $ | 1,104 | | | | 2.4 | % | | $ | 681 | | | | 1.4 | % |
Revenue
Revenue for the three month period ended March 31, 2010 was $15.3 million, compared to $15.4 million for the three month period ended May 31, 2009, a decrease of $0.07 million or 0.5%. Revenue remained relatively unchanged.
Revenue for the nine month period ended March 31, 2010 was $45.1 million, compared to $48.6 million for the nine month period ended May 31, 2009, a decrease of $3.4 million or 7.1%. Revenue decreased primarily due to attrition of customers and the impact of the economic slowdown on our customers.
Gross Profit
Gross profit for the three month period ended March 31, 2010 was $2.6 million, representing 17% of revenue, compared to $3.1 million, representing 20% of revenue for the three month period ended May 31, 2009, a decrease of $0.5 million or 15%. Gross profit decreased due to higher workers compensation claims.
Gross profit for the nine month period ended March 31, 2010 was $9.2 million, representing 20% of revenue, compared to $9.8 million, representing 20% of revenue for the nine month period ended May 31, 2009, a decrease of $0.6 million or 5.9%. Gross profit decreased due to the decrease in revenue.
Operating Income
Operating loss for the three month period, ended March 31, 2010 was $0.1 million, compared to operating income of $0.3 million for the three month period ended May 31, 2009, a decrease of $0.4 million or 4%. Operating income decreased due to higher workers compensation claims an increased SUTA rates.
Operating income for the nine month period, ended March 31, 2010 was $1.1 million, compared to $0.7 million for the nine month period ended May 31, 2009, an increase of $0.4 million or 62%. Operating income increased due to overall efficiency improvements and expense reductions in all areas of the companies operations including reductions in internal staffing levels.
Holding Company
Operating Expense
The Holding Company does not have any income producing operating assets. As such, the operating loss was equal to operating expenses. Operating expenses consist primarily of legal, accounting and consulting fees. Operating expenses for the three month period ended March 31, 2010 were $0.2 million, compared to $0.02 million for the three month period ended May 31, 2009, an increase of $0.2 million or 9,250%. Operating expense increased due to the timing of the allocation of expenses to our subsidiaries.
The Holding Company does not have any income producing operating assets. As such, the operating loss was equal to operating expenses. Operating expenses consist primarily of legal, accounting and consulting fees. Operating expenses for the nine month period ended March 31, 2010 and May 31, 2009 were $0.6 million and $0.4 million representing a increase of $0.02 million or 60%. Operating expense increased due to the timing of the allocation of expenses to our subsidiaries.
Interest Expense
Interest expense was $0.002 million for the three month period ended March 31, 2010, compared to $0.03 million for the three month period ended May 31, 2009, a decrease of $0.03 million or 93.8%. The decrease was due to extinguishing our term note payable in January 2010.
Interest expense was $0.01 million for the nine month period ended March 31, 2010, compared to $0.1 million for the nine month period ended May 31, 2009, a decrease of $0.1 million or 91%. The decrease was primarily due to the satisfaction of our related party debt.
Income Taxes
Income tax expense was $0.01 and $0.02 million for the three months ended March 31, 2010 and May 31, 2009, respectively. A valuation allowance is necessary to reduce the deferred tax assets, if the Company had a federal tax operating loss and based on the weight of the evidence; it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management has determined that a $3.3 million valuation allowance at March 31, 2010 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current period is approximately ($0.4) million.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity include cash and equivalents and proceeds from debt borrowings. We had cash and equivalents of $1.7 million at March 31, 2010 and June 30, 2009.
We had working capital of $0.3 million at March 31, 2010 compared with ($1.0) million at June 30, 2009. The increase in working capital was primarily due to improving our profitability by better management of our costs and the decrease in our health and workers’ compensation reserves based on our claim experience. Current assets are primarily comprised of cash and equivalents, net accounts receivable, and prepaid expenses. Current liabilities are primarily comprised of accounts payable and accrued expenses.
The Company is required to collateralize its obligations under its workers’ compensation and health benefit plans and certain general insurance coverage. The Company uses its cash and cash equivalents to collateralize these obligations. Restricted cash was approximately $3.3 million and $3.1 million at March 31, 2010 and June 30, 2009, respectively.
Total debt at March 31, 2010 and June 30, 2009 was $0.02 and $0.3 million, respectively.
Cash Flows
Cash flows provided by operations for the nine month period ended March 31, 2010 and May 31, 2009 were $0.3 million and $1.3 million, respectively. This decrease in operating cash flows was due primarily to the decrease in accounts payable and health and workers’ compensation reserves.
Net cash flow used in investing activities was $0.05 million for the nine month period ended March 31, 2010 compared to $0.1 million for the nine month period ended May 31, 2009. The decrease was primarily due to the fact that no major fixed assets were acquired during the nine month period ending March 31, 2010.
Net cash flow used in financing activities was $0.2 million for the nine month period ended March 31, 2010 compared to $3.7 million for the nine month period ended May 31, 2009. The increase was primarily the result of making our final balloon payment for the Laurus convertible debt in November 2008.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes to the Company’s contractual obligations from those disclosed in the Form 10-K under “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
OFF BALANCE SHEET ARRANGEMENTS
As is common in the industries we operate in, we have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include transactions with related parties, liabilities associated with guarantees, letter of credit obligations and surety guarantees.
Transactions with Related Parties
We have entered into various acquisition agreements over the past three years which contain option agreements or rights between the sellers of the acquired entities and our two majority shareholders, the Chairman and the former CEO, related to the Company’s stock provided as consideration under the acquisitions. The Company entered into an agreement in which the sellers of ESG may put (put option) the 217,143 shares issued at closing to the Company during the thirty (30) day period that begins on March 1, 2010. The Company recorded $814 related to the put options on the 217,143 shares as a current liability, since the Company is not able to control whether such options will be put to the Company or sold on the open market during the required time period.
Guarantees
Significant portions of our letters of credit are personally guaranteed by the Company’s Chairman. Future changes to these guarantees would affect financing capacity of the Company.
Restricted Cash
Certain states and vendors require us to post letters of credit to ensure payment of taxes or payments to our vendors under health insurance and workers’ compensation contracts and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this situation were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement. We do not believe that it is likely that any claims will be made under a letter of credit in the foreseeable future. As of March 31, 2010, we had approximately $3.3 million in restricted cash primarily to secure obligations under our PEO contracts in the Business Solutions segment.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information previously reported under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company file pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its CEO, CFO, and Chief Operating Officer (“COO”) as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, including the CEO, CFO, and COO, recognizes that, because the design of any system of controls is based in part upon certain assumptions about the likelihood of future events and also is subject to other inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired objectives.
Under the supervision and with the participation of the Company’s management, including the Company’s CEO, CFO and COO the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2010. Based on this evaluation, the CEO, CFO, and COO have concluded that, for the reasons more fully set forth below, the Company’s disclosure controls and procedures were not effective on March 31, 2010 in providing reasonable assurance that information required to be disclosed in the reports the Company file pursuant to the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
More specifically, the Company’s management has concluded that: (i) additional accounting personnel were needed at certain subsidiaries at March 31, 2010 to ensure that certain disclosure controls and procedures were operating effectively; (ii) greater segregation of duties was needed in the accounting functions; and (iii) certain procedures should be documented to ensure that personnel turnover does not result in a failure of those procedures. The Company will continue to evaluate the need for additional staff at the parent and subsidiary levels, but given the size and location of the Company’s subsidiaries the Company believes it will continue to face challenges in attracting and retaining qualified personnel. Additionally, the Company is also in the process of evaluating ways in which the impact of personnel turnover on the implementation of disclosure controls and procedures can be reduced. Management continues to evaluate the effectiveness of this segregation and the need for additional enhancements, including, but not limited to, the addition of accounting personnel.
PART II—OTHER INFORMATION .
Item 1. Legal Proceedings.
The Company is not involved in any legal proceedings or claims that management believes will have a material adverse effect on the Company's business or financial condition.
Item 1A. Risk Factors
There have been no material changes with regard to the risk factors previously disclosed in our most recent Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits
The following exhibits are included herein:
| 31.1 | Rule 15d-14(a) Certification of CEO |
| 31.2 | Rule 15d-14(a) Certification of CFO |
| 32.1 | Section 1350 Certification of CEO |
| 32.2 | Section 1350 Certification of CFO |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Fortune Industries, Inc. | |
| | (Registrant) | |
| | | |
| Date: 05/13/11 | By: /s/ Tena Mayberry | |
| | Tena Mayberry, | |
| | Chief Executive Officer | |
| | | |
| Date: 05/13/11 | By: /s/ Randy E. Butler | |
| | Randy E. Butler, | |
| | Chief Financial Officer | |
